You are suppose to repeat rows 1 and 2 12 times. Row 1, the set up row, tells you where all the increases are. You left one of them out though. The yarn overs make the increases. In row 1 you have 8 yarn overs those are your 8 increases (you only wrote 7 but I'm sure the pattern says 8).
What you are doing here is setting up the different sections of the sweater. The first 9 stitches are the left front of the sweater. Then you have a yarn over and a seam stitch and then another yarn over. That is the seam between the left front and the sleeve. Then you do 3 stitches that will be the sleeve and then another YO, seam stitch, and YO, for the seam between the sleeve and the back of the sweater. Then you knit 18 for the back. Then you YO, seam stitch, YO for the seam between the back and the other sleeve. K3 for the next sleeve and then do another YO, seam st, YO for the seam between the second sleeve and the right front. K9 for the right front.
It doesn't make it real clear but when you repeat rows 1 and 2 you will actually have one more stitch each time on each front and 2 more stitches in each sleeve section (one on each side), and 2 more in the back on each side where the back meets the sleeves. That adds up to 8 increases.
You keep building the sections by doing a yarn over on each increase row on each side of the seam stitches. You might like to place a marker right before each seam stitch. Then each time you come to the marker (on the increase rows) you will yarn over just before the seam stitch and just after it. The seam stitches will stay the same throughout. They will make a line of knit stitches and the yarn overs will make decorative holes on each side of the seam stitches.