Jeff, you got it. Leave the top of the top sash and the bottom of the bottom sash bare (no primer and no paint). These spots are hidden when the window is closed so it is not an issue with appearance and by leaving them bare wood you allow the sashes to breath and better expel moisture.
We typically use whiting for this, but the powdered joint compound is the only other product I've ever used.
Did you use the wet abrasive method to remove the paint to the level it is at the start of the video, or is this method only for surface prep prior to priming?
This may stabilize the plaster a bit but it certainly doesn't solve the problem of sagging plaster. If you're not read hearing the plaster to the lath then the whole project is pointless. Use plaster washers and an adhesive like Big Wally's Plaster Magic or plaster washers a d skim coat over them. This is not an effective plaster repair though I do like the idea of the plastic on the wall. Not sure how much it helps but it's an easy cheap step that might make clean up easier.